Macro Investor: Shorting iron ore

Iron ore prices (as measured by 62% fines) have fallen over 50% from their peak at almost $200 per tonne, after doubling twice from early 2009.

This dynamic is due to collapsing demand, as inventories in China climb to new heights amid increasing volume output from Chinese, Australia, African and Brazilian suppliers.

…Due to the lack of price discovery in iron ore, calculating a possible price target is very difficult. Technicals suggest a $75 bottom but $60 per ton is not out of the question. We agree the most likely outcome is then a 20-40% bounce in prices back to $100/110 per tonne.

Some in the market are already advising catching this falling knife for any subsequent bounce. We do not see it that way. Rather, the risk/reward equation is better following the trend and managing the trades dynamically with much tighter trailing stop losses once they correspond with a break even position. When the price turns we’ll reverse the trade and make money going up too. It’s much more profitable over time to forget trying to be right or wrong and manage your capital instead.

To read the rest of this trade idea, take up your free 21 day trial at Macro Investor.

David Llewellyn-Smith
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  1. “We agree the most likely outcome is then a 20-40% bounce in prices back to $100/110 per tonne.”

    What do you think is going to make it bounce Chinese stimulus or something else?

  2. I reckon the short term bottom is in now that you have finaly got your head around $60 as a possibility.

    It will get there eventually though.

    • Looking at the GDP growth assumptions on Page 23

      “First we assume that the Chinese GDP per capita grows at 8 per cent per annum
      for the next 20 years, rather than around 6 per cent in the baseline. Lin (2011) suggests that China has the potential to do so considering China’s stage of development relative to that of the United States, and the growth performance of Japan, Taiwan and Korea when they were at a similar stage of development.
      In this case we project that China’s growth rate will follow the same deceleration after 2032 as the growth rate from World Bank and Development Research Center (World Bank and Development Research Center of the State Council, the People’s Republic of China) (2012). Accordingly, China’s PPP-adjusted GDP per capita reaches almost US$80 000 by 2040 (at 2005 prices), compared to around US$40 000 in the baseline projection.
      • In the low-growth alternative we assume that GDP per capita growth is
      2.7 percentage points lower than the baseline growth rate. This difference
      is equivalent to one standard deviation of the distribution of growth rates
      experienced in China between 2000 and 2009.22 In this case, China’s PPPadjusted
      GDP per capita reaches US$20 000 by 2040 (at 2005 prices).
      Under the high-growth assumption, floor space construction peaks in 2023,
      25 per cent above recent levels, and remains above current levels for all but
      the last couple of years of the projection period (Figure 15). Under the lowgrowth assumption, construction is effectively at its peak now and will be almost 40 per cent below the baseline by the end of the projection period.”

      • Gentlemen, I have read the report 🙂 Simply putting it out there for info. It remains wait and see which growth assumption prevails over time.

    • I’m amazed at this RBA thingey, not only are they experts on the Australian economy, but China as well, is there anything they can’t do?

      Must have one of those red telephones direct to the politburo installed recently.